What’s the Story?

We compare the wholesale and direct-to-consumer (DTC) sales channels and cover a landscape of brands that are pivoting toward a DTC approach. We also present a playbook for brands and retailers to improve their wholesale and DTC strategies, including alternative wholesale approaches.

Our coverage of wholesale distribution comprises third-party channels that brands rely on to sell their products (typically wholesalers or third-party retailers and marketplaces). DTC refers to brands bypassing wholesalers or third-party retailers and marketplaces to sell products via their own operations—either their own e-commerce websites or physical stores.

Why It Matters

Selling directly to consumers used to be a strategy attributed to new brands that would otherwise be overshadowed by larger market rivals. However, it is becoming an increasingly important channel for both new and existing brands, whether big or small, given the advantages of faster speed-to-market, better customer insights, and increased control over data, brand image and pricing.

Within this shift, many brands are rethinking wholesale efficiency and are seeking a harmonious solution for wholesale and DTC channels—or a pure DTC sales strategy—highlighting the range of needs across brands and categories.

DTC vs. Wholesale: A Deep Dive

Advantages and Disadvantages of Wholesale and DTC

Traditionally, major brands have worked with retailers through wholesale models, selling their products at a specified cost, which the retailer then marks up to sells the product to consumers. Today, brands are increasingly selling directly to consumers through their own channels

We present the advantages and disadvantages of these two distribution models in Figure 1.

Figure 1. DTC vs. Wholesale Channel: Advantages and Disadvantages from a Brand Perspective

Brands Pivoting Toward DTC

In the past three years, we have seen more brands—particularly in the apparel and footwear, beauty, grocery, and luxury sectors—embracing the DTC model to stay competitive.

We discuss three ways for brands to improve their DTC exposure, before presenting recent DTC pivots and revenue growth momentum among key players.

1. Reduce wholesale doors: To best display and sell products and connect with consumers, brands must move away from undifferentiated wholesale doors and focus on DTC channels.  Gucci, NIKE and Under Armour have recently announced reductions to their wholesale doors and partners, in favor of their own physical stores and e-commerce websites.    
2. Optimize DTC website functions: Brands looking for better DTC sales should ensure that their digital capabilities rival those of their strongest retail competitors with websites that offer smooth search functions, clear layouts and engaging content. Wander Beauty’s incorporation of shoppable function into its e-commerce video library is an example of ways to improve website engagement. This development led to growth in DTC sales, according to a statement from the company in August 2020. For legacy brands taking their first step into DTC, establishing a retail website is naturally the first essential step, with brand owners such as AB InBev, Beyond Meat, Moncler and PepsiCo recently launching DTC websites for direct sales.
3. Launch a separate DTC brand: Brands that have both wholesale and DTC sales channels can look to launch a separate DTC brand that will scale the business, generate new revenues streams and provide a more refined insight into consumer preferences. Examples of recent DTC brand launches include Coty’s DTC brand Kylie Skin (2019); Kraft Heinz’s first DTC business line “Heinz to Home” (May 2020); and Ocean Spray’s private-label dog product brand (August 2020).

Figure 2 covers recent developments among key brands in their shift toward DTC sales operations.

Figure 2. Selected List of Brands Pivoting Toward DTC Sales, by Category

Revenue Growth: DTC Sees Momentum

The majority of the brands we cover saw momentum, or at least greater resiliency, in DTC channel revenue growth in fiscal 2020—while many (with Moncler as the exception) saw relatively lower revenue growth in wholesale.

Although more brands are now looking to bypass traditional, multi-brand distribution channels to sell directly to consumers, building a 100% DTC model will be time intensive and brands will likely be cautious in giving up existing customer bases to give up developed through multi-sales channels. Moreover, the growing power of third-party marketplaces and retail giants such as Amazon, Target and Walmart still offer significant partnership opportunities for brands.

As such, we expect brands to continue to rely on a hybrid wholesale-DTC model for the next three years, but with growth in the proportion of DTC exposure and an increase in DTC businesses. All brands included in Figure 3 expect their DTC exposure to increase over the next three years.

Figure 3. A Selected List of Key Brands’ 2020 Revenue Growth, by Channel

A Playbook on Wholesale and DTC Models

Alternative Wholesale Models

Wholesale channel partners, such as department stores and e-commerce marketplaces, are offering alternative wholesale models for brand cooperation, offering opportunities for brands to optimize their wholesale businesses in order to stay competitive.

Marketplaces

• E-commerce retailer and marketplace Zalando allows brands in its Zalando Fashion Store to retain control over products, prices and brand representation. Zalando recently disclosed that it sees great potential in this kind of model and expects its Partner Program to contribute 40% of its GMV by 2023. The company attributes this opportunity to the fact that the model allows brands to use Zalando’s fulfillment solutions, infrastructure and strong customer base while retaining their own control.

Dropshipping

Dropshipping has already taken hold in the Asia-Pacific region, which currently makes up 31.9% of the worldwide dropshipping market, according to Research and Markets, a Dublin-based research firm. While the US has not yet seen widespread adoption of dropshipping, we expect it to see rapid growth over the next few years. The global dropshipping market was valued at $162 billion in 2019 and is set to reach $592 billion by 2027, according to Research and Markets—representing a CAGR of 18.3%.

• Nordstrom is planning to increase its digital capabilities in 2021 through extended branded partnerships featuring dropshipping, according to its announcement earlier this year in February. The dropshipping capability will allow brands to send products directly to customers once Nordstrom accepts an online order, offering more freedom for the brand to package products and connect with customers. The new model will also help Nordstrom to expand its product assortment while reducing inventory overhead and cyclical markdowns—risks associated with the wholesale model.

Strategies for Brands To Improve Wholesale Channel Sales

• Partner with winning wholesale channels: Digitally capable retailers such as Amazon, Target and Walmart will enable brands to capitalize on consumers’ online shopping habits. For example, Kontoor Brands reported that its e-commerce sales increased by 38% and its US digital wholesale sales increased by 59% year over year in fiscal 2020—attributing the growth to its optimized distribution strategy, whereby it partners big, digital-focused retailers including Amazon, Target and Walmart.
• Partner with retailers offering alternative wholesale models: Retailers are figuring out new ways to partner with brands and increasingly turning to dropshipping as a solution, as discussed above. For example, Prada started to offer dropshipping options for sales on Net-a-Porter in February 2021. Moreover, G-III Apparel Group also plans to build dropshipping capacity, according to the company’s December 2020 earnings call.
• Focus on wholesale partners that align with brand positioning: Brands should reconsider partnerships with undifferentiated wholesale doors, such as some mid-range department stores, and prioritize channels that fit with their specific positioning. Levi’s has recently refined its wholesale business by focusing on accounts in the value and premium segments that it seeks to target, as well as with partners that have a wider reach among younger consumers—the brand’s focus audience.
• Improve wholesale sales strategies: As well as choosing the right partners, brands must communicate with the wholesalers on inventory and pricing strategies to improve sales results. An example of communication improvements to improve sales is the recent move by Adidas to link up its own inventory system with that of its wholesale partners. As such, both the brand and its wholesale partners can address any gaps in product and size availability and tailor assortment to consumer demand. Moreover, Adidas has integrated its product images and descriptions into its wholesale partners’ systems to boost their websites and app experiences.

Strategies for Brands To Improve DTC Channel Sales

• Create a community to promote brand values: Creating a brand community is important in confirming to consumers that the products they buy align with their preferences and lifestyle choices. For example, Nescafé’s brand Dolce Gusto (NDG) focused on building a community of coffee lovers that value quality, sustainable coffee and now seeks to engage that audience through its Premio loyalty program—which reached one million members in 2020.
• Engage directly with consumers: Brands must offer interesting content and unique experiences to build a relationship with consumers. For example, to communicate more directly with customers, Under Armour has launched targeted marketing campaigns, experiential offerings such as fitness courses, and unique collaborations—such as with basketball player Stephen Curry in 2020. It is important for companies with DTC businesses to tell their own brand stories.
• Improve shipping efficiency: Most marketplaces and wholesale channels, such as department stores and mass merchants, have already adopted fast shipping options. As such, brands need to speed up delivery to compete with rapid options. They can look to utilize stores for fulfillment and take last-mile efforts in-house to improve efficiency.

What We Think

Implications for Brands

• To optimize wholesale partnerships, brands must look to retailers that have strong digital capabilities to capitalize on consumers’ online shopping habits. Brands should also consider partnering with retailers that offer dropshipping as an alternative wholesale model.
• To increase DTC sales, we recommend that brands create a community surrounding their values to connect consumers and confirm that the brand aligns with their preferences. It is also vital that brands engage directly with consumers with interesting brand content or unique experiences.

Implications for Wholesale Channel Players

• Retailers, department stores and marketplaces should offer alternative models to attract brands to partner with them for their wholesale business.